Do Mergers Add Value After All?

The perception that mergers and acquisitions destroy shareholder value may be out of date.Andrew Sawers, CFO MagazineJune 15, 2012

For years, debate has raged over the value of mergers and acquisitions. Studies have tended to find that M&A is a surefire way to destroy shareholder value in acquiring firms. Yet, companies keep making acquisitions to grow market share, expand geographically, and diversify into other industries.

A new study suggests that the conventional wisdom is at least incomplete. True, the November 2011 report, by researchers at the M&A Research Centre at Cass Business School in London, shows that most deals don't add value to share-price performance in the three-year period after they are announced. But the study, which examined more than 3,000 UK acquisitions by UK companies between 1997 and 2010, also found that successful deals create more value than unsuccessful deals destroy.

While about 60% of acquisitions in the study failed to create value, the net share-price returns of all acquirers were positive. During the 40 days after an acquisition, net cumulative abnormal returns (the difference between actual returns and a market index) were about 6%, equal to an average of about £178 million (about $287 million) in value per deal.

One possible explanation for this result: savvier dealmakers. "These days, more companies of a certain size will have a corporate-development or a strategy department and will look for deals and targets, so they have a lot of experience," says Anna Faelten, deputy director of the M&A Research Centre and author of the study.

The longer-term picture, from 4 months before until 36 months after a deal, shows that overall, acquisitions create value in the run-up to a deal, with acquirers' share prices outperforming the market index at a peak of 7.5% in the 2 or 3 months after a deal (see chart below). From then on, outperformance starts trending back toward just 1% after three years. The research suggests that acquirers can take advantage of this trend "by including shares in the deal consideration offered to target shareholders" and then timing the deal to coincide with a peak in the share price. (The findings also suggest that the more cash in the mix, the more successful the deal.)

Ultimately, Faelten contends, the idea that up to 70% of M&A deals destroy value is dated. "People have been using those numbers for a very long time," she says, adding that some of the influential studies date back to the 1980s.

The UK government's Department for Business, Innovation and Skills commissioned the study, "The Economic Impact of M&A: Implications for UK Firms," in the wake of public furor over Kraft Foods's 2010 acquisition of UK confectionery group Cadbury, a transaction that began as a hostile bid. Not only does the research fail to "provide any evidence that hostile takeovers are value destroying in the long run," but it also shows "that acquirers involved in hostile deals generate more shareholder value compared with those involved in friendly takeovers," the study says.

Andrew Sawers is editor of CFO European Briefing, a CFO online publication.